If the Pigou effect characterizes the economy then the slope
A)of the aggregate demand curve is zero;the aggregate supply curve is vertical.
B)of the aggregate supply curve is zero;the aggregate demand curve is vertical.
C)of both the AD and SAS curves are vertical.
D)of the AD cannot be vertical;the aggregate supply curve is unaffected.

Question

Quizplus · Accepted Answer

The Pigou effect suggests that a fall in prices increases the real balance of money, which can increase consumption and shift the aggregate demand curve rightward. This implies that the aggregate demand curve cannot be vertical, as it must be able to shift in response to changes in real balances. The aggregate supply curve's slope is not directly affected by the Pigou effect.

If the Pigou Effect Characterizes the Economy Then the Slope